Adeia Inc

NASDAQ:ADEA

Earnings Call Analysis

Strong Q2 with Revenue of $87.4M and Debt Repricing

Adeia reported Q2 revenue of $87.4 million, signing five license agreements across diverse markets. Notably, operating expenses rose by $1.2 million to $35.1 million. They successfully repriced their debt, saving $3.4 million annually. The term loan balance is now $549.1 million. The company secured a multiyear renewal with Liberty Global and resolved litigation with X Corp., which helped lower expenses. Full-year 2024 revenue remains guided at $380-$420 million, while operating expenses are revised down to $145-$155 million. Adjusted EBITDA margin is projected at 63%, reflecting strong financial health and strategic progress.

Strong Second Quarter Performance

In the second quarter of 2024, Adeia reported a revenue of $87.4 million, matching previous expectations. This was supported by five new licensing agreements across various sectors: social media, consumer electronics, semiconductors, and pay-TV. Notably, the leadership is optimistic about sustaining this momentum into the second half of the year as they anticipate significant growth in both OTT and semiconductor markets.

Managing Operating Expenses Effectively

Non-GAAP operating expenses were recorded at $35.1 million, a slight increase of 3% from the previous quarter. This was primarily driven by a 4% rise in R&D expenditures, focusing on patent filings. Administrative costs saw a reduction of 4%, aided by recovering bad debt expenses from a previous contract dispute. Interestingly, litigation expenses rose dramatically by 45%, totaling $4.3 million, reflecting the ongoing management of legal matters.

Financial Improvements and Debt Management

Adeia successfully decreased its interest expenses by repricing its Term Loan B, yielding savings of over $3 million annually. By the end of the quarter, the company had $94.5 million in cash and marketable securities, alongside generation of $23.5 million from operations, showcasing effective cash management. The term loan balance concluded at $549.1 million, reflecting a disciplined approach to debt paydown with $12 million in principal payments during the quarter.

Future Growth Guidance

Looking ahead, Adeia reiterated its full-year revenue guidance, forecasting between $380 million and $420 million. They predict revenue growth propelled by new agreements in OTT and semiconductor sectors. Furthermore, the company has revised its operating expenses guidance downward to a range of $145 million to $155 million, $5 million lower than previously anticipated, reflecting lower-than-expected third-party spending and litigation costs. Likewise, the adjusted EBITDA margin is projected at approximately 63% for the year.

Strategic Focus on Intellectual Property

Adeia underscores its commitment to expanding its intellectual property portfolio, having closed the quarter with over 11,500 patent assets. They ranked as a leading patent filer globally, significantly outpacing larger competitors in the media and semiconductor sectors. The focus on R&D is instrumental to their strategy, aiming for organic growth while also pursuing acquisitions to bolster their market position.

Key Partnerships and Licensing Agreements

During the quarter, Adeia renewed several key licensing agreements, including multiyear contracts with prominent companies like Liberty Global, Panasonic, and Hamamatsu. These partnerships illustrate the company’s robust strategy to reinforce its customer base and enhance its offerings in the OTT and semiconductor markets.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, everyone. Thank you for standing by. Welcome to Adeia's Second Quarter 2024 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions.



I would now like to turn the call over to Chris Chaney, Vice President of Investor Relations for Adeia. Chris, please go ahead.

[Chris Chaney, executive]

Good afternoon, everyone. Thank you for joining us as we share with you details of our quarterly financial results. With me on the call today are Paul Davis, our President and CEO; and Keith Jones, our CFO. Paul will share with you some general observations regarding the quarter, and then Keith will give further details on our financial results and guidance. We will then conclude with a question-and-answer period. In addition to today's earnings release, there is an earnings presentation, which you can access along with the webcast in the IR portion of our website.



Before turning the call over to Paul, I would like to provide a few reminders. First, today's discussion contains forward-looking statements that are predictions, projections or other statements about future events, which are based on management's current expectations and beliefs and therefore, subject to risks, uncertainties and changes in circumstances. For more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today. Please refer to the Risk Factors section in our SEC filings, including our annual report on Form 10-K and our quarterly report on Form 10-Q.



Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results as we do internally.



We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release, the earnings presentation and on the Investor Relations section of our website. A recording of this conference call will be made available on the Investor Relations website at adeia.com.



Now I'd like to turn the call over to our CEO, Paul Davis.

[Paul Davis, executive]

Thank you, Chris, and thank you, everyone, for joining us today. We delivered results for the second quarter that were in line with our expectations, with revenue of $87.4 million and adjusted EBITDA of $52.8 million. I am pleased with the progress we are making across all aspects of our business, and we remain on track to achieve our strategic objectives for 2024.



During the second quarter, we signed 5 license agreements across diverse end markets, including in social media, consumer electronics, semiconductors and pay-TV. Additionally, shortly following the end of the quarter, we signed a multiyear renewal with Liberty Global, a leading European pay-TV operator. We continue to pay down our term loan in the second quarter, and we saw an opportunity to reprice our debt. I am very pleased with the terms of the repricing, which will save us over $3 million annually in lower interest expense and provide us with additional financial flexibility moving forward.



We remain committed to continuing to pay down our debt. And under the new terms, we will be able to take a more balanced approach to capital allocation and return more capital to shareholders and have more firepower for tuck-in acquisitions to help grow our business. Since our separation, we have been diligently working to add license agreements in key growth verticals such as OTT, semiconductors and adjacent media markets. We're very excited with the agreements we've signed to date and the progress we are making on new deals in each of these markets. During the quarter, we also continued to expand our pipeline of opportunities in both media and semiconductors as we look to continue to grow our business in 2025 and beyond.



In the second quarter, we were very pleased to reach an agreement with X Corp., formerly Twitter for a multiyear license renewal. The agreement resolves all outstanding litigation, and I am pleased that X Corp. is a paying customer once again. The agreement further validates the value of our IP and demonstrates our commitment to enforcing the contractual terms we have with our customers. We also signed a multiyear renewal with Panasonic, which continues our success in consumer electronics and signed multiyear renewals with 2 regional pay-TV providers in the U.S.



In semiconductors, we signed a new long-term agreement with Hamamatsu. This new agreement supplements an existing license, adding access to our die-to-wafer hybrid bonding technology. This new agreement follows from a prior development license to our wafer-to-wafer hybrid bonding portfolio and a technology transfer agreement. Our relationship with Hamamatsu highlights how partnerships with our customers can help accelerate the advancement of their hybrid bonding capabilities and improve their products.



As noted earlier, shortly following the close of the second quarter, we also signed a multiyear renewal with Liberty Global, a leading pay-TV provider in Europe. This deal is significant as we continue to strengthen our customer base internationally. We are on track to meet our objectives for this year and continue to make progress towards our long-term goals. We plan to drive revenue growth by growing our customer base in OTT, adjacent media markets and semiconductors and by maintaining our strong renewal rates in our well-established pay-TV, consumer electronics and social media verticals.



To continue to grow our revenue and customer base, it is imperative that we further expand our IP portfolios. We closed the second quarter with over 11,500 worldwide patent assets. Our portfolio growth objectives are focused on maintaining our strong renewal rate while adding new customers in our key growth markets. Our customer relationships are founded on the value of our IP and are fundamental to renewals. Our investments in R&D and augmenting our technical sales and engagement resources will drive the addition of new customers in both existing and adjacent markets.



Our priority remains to grow our portfolios organically through investments in internal R&D and inorganically by actively pursuing acquisition opportunities that strategically enhance our organic efforts. Our focus at Adeia is driving next-generation innovations for our customers and markets we serve. As such, we were thrilled to be recognized amongst the most prolific inventors in the world for 2023 by Hardy & Hardy, a leading patent analytics firm.



Last year, we were granted 554 patents for which we were ranked #70 in the world for the number of granted patents. We ranked higher on the list than many of the most well-respected media companies, such as AT&T, Verizon and Comcast and some of the hottest semiconductor companies leading the AI charge, such as AMD and NVIDIA. This is particularly remarkable since these companies have significantly larger R&D resources than we do. Yet, we achieved these results because of our unique business model, which allows our dedicated scientists and engineers to be exclusively focused on critical forward-looking innovations. I am immensely proud of our team for this accomplishment.



Thought leadership is one of our hallmarks and demonstrates our commitment to innovation. Our R&D professionals continue to fully engage in the ecosystems in which we participate, delivering insightful presentations speaking on topical panels at industry conferences and publishing research on important forward-looking trends. In the second quarter, members of our media team presented computing while cooling at Streaming Media NYC and participated in a panel on the pivotal role of R&D in gaming innovation at the XP24 Game Summit.



Likewise, members of our semiconductor team gave 2 presentations on hybrid bonding at this year's Electrical Components and Technology Conference in Denver. I was particularly proud that our paper on fine pitch die to wafer hybrid bonding was recognized as Best Session paper at the conference. Additionally, we delivered a presentation on co-optimization of semiconductor systems at the 2024 Semi-3D and Systems Conference. I am very pleased with the progress we have made to date, and I am confident we will achieve our 2024 goals.



With that, I would like to now turn the call over to Keith for a review of our second quarter financial results.

[Keith Jones, executive]

Thank you, Paul. I am pleased to be speaking with you today to share details of our second quarter 2024 financial results. During the second quarter, we delivered revenue of $87.4 million, driven by the execution of 5 license agreements across a diverse mix of end markets, including social media, consumer electronics, semiconductor and pay-TV. These results are in line with our prior expectations as we anticipate seeing strong momentum in the second half of the year.



Now I would like to discuss our operating expenses, for which I'll be referring to non-GAAP numbers only. During the second quarter, operating expenses were $35.1 million, an increase of $1.2 million or 3% from the prior quarter. Research and development expenses increased $590,000 or 4% from the prior quarter. The increase in the second quarter is primarily related to patent filings and related maintenance costs.



Selling, general and administrative expenses decreased $773,000 or 4% from the prior quarter, primarily due to the recovery of bad debt expenses associated with the resolve contract dispute with X Corp. and due to lower corporate administrative costs. These decreases were partially offset by increased third-party spending associated with the build-out of our licensing platforms in OTT, semiconductor and adjacent media markets. Litigation expense was $4.3 million, an increase of $1.3 million or 45% compared to the prior quarter, primarily due to the timing of expenses related to certain legal matters.



Interest expense during the second quarter was $13.3 million, a decrease of $879,000 from the prior quarter due to the benefit of a lower interest rate following the successful repricing of our Term Loan B and due to our continued debt repayments. Our current effective interest rate, which includes amortization of debt issuance costs, was 9.6%. Other income was $1.4 million and was primarily related to interest earned on our cash and investment portfolio and due to interest income recognized on revenue agreements with long-term billing structures under ASC-606.



Our adjusted EBITDA for the second quarter was $52.8 million, reflecting an adjusted EBITDA margin of 60%. Depreciation expense for the quarter was $490,000. Our non-GAAP income tax rate remained at 23% for the quarter. Our income tax expense consists primarily of federal and state domestic taxes as well as Korean withholding taxes.



Now for a few details on the balance sheet. We ended the second quarter with $94.5 million in cash, cash equivalents and marketable securities and generated $23.5 million in cash from operations. We made $12 million in principal payments on our debt in the second quarter and ended the quarter with a term loan balance of $549.1 million. Here in the second quarter, in light of favorable market conditions, we saw an opportunity to reprice our existing term loan agreement. We are very pleased with the outcome of the repricing as we achieved 2 significant benefits. First, we successfully lowered the fixed interest rate component by 61 basis points. This results in a significant $3.4 million savings on an annual basis.



Secondly, we greatly reduced the mandatory excess cash flow payment thresholds, effectively providing us with greater financial flexibility on our uses of capital as we exit 2024. Specifically, while we remain dedicated to deleveraging our balance sheet by continuing to make accelerated payments on our term loan. This improved flexibility will allow us to take a more balanced approach in returning capital to shareholders through stock repurchases in addition to our current dividend program.



Additionally, we have increased our capacity to grow our business through tuck-in acquisitions. During the second quarter, we paid a cash dividend of $0.05 per share of common stock. Our Board also approved a payment of another $0.05 per share dividend to be paid on September 17 to shareholders of record as of August 27.



Now I will go over our guidance for the full year 2024. We are pleased with the progress we are making on executing our sales pipeline. Consequently, we are reiterating our prior revenue guidance for the full year. We expect revenue to be in the range of $380 million to $420 million, which includes significant new license agreements in both OTT and semiconductor in the second half of the year.



During the first half of the year, we have seen continued execution of our various strategic objectives. As the year has progressed, we have achieved these goals with lower-than-expected third-party spending as we develop our new licensing platforms. We have been able to leverage our internal resources to a greater extent than initially planned. Additionally, our litigation expenses have been somewhat lower than expected due to the settlement with X Corp. and the timing of ongoing litigation. As a result, we are lowering our guidance for operating expenses, and we expect them to be in the range of $145 million to $155 million, which is $5 million less than we previously guided.



We remain dedicated to our commitment to R&D as we grow and expand our IP portfolio. Because of our lower interest rate from our debt repricing, our interest expense will be less than we originally anticipated. As such, we are lowering our guidance for interest expense to be in the range of $52 million to $55 million, which is $2 million less than we previously guided. We expect other income to be in the range of $5 million to $6 million. We expect a resulting adjusted EBITDA margin of approximately 63%. We expect the non-GAAP tax rate to remain consistent at roughly 23% for the full year. We also expect capital expenditures to be approximately $2 million for the full year.



The second quarter was in line with our expectations. We are progressing nicely on all fronts, and we remain confident we will achieve our goals for the year. The concerted efforts of the entire Adeia team will serve as a springboard for success as we strive to grow and expand our exceptional business model. That brings into our prepared remarks.



And with that, I'd like to turn the call over to the operator to begin our question-and-answer session. Operator?

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Kevin Cassidy with Rosenblatt Securities.

[Kevin Cassidy, analyst]

Congratulations on the great progress for 2024. I'm just wondering there is news out on some OTT companies raising their prices to consumers. Do you have any view on how this would affect both your OTT market or even your pay-TV market?

[Paul Davis, executive]

Kevin, great question. I think we're focused Obviously, on the OTT market, as you note, we've made some really nice strides in getting deals done with the Zone and Starz and Paramount recently. And we've signaled that we anticipate having success in the OTT market with some more significant players here this year as well. And so, with our engagements, we typically look at the number of subscribers that an OTT platform might have. Certainly, price comes into it in terms of as we compare it to what our rates are that we have with pay-TV, but we don't think it will have a significant impact ultimately to what we're able to achieve from a licensing standpoint with our business.

[Kevin Cassidy, analyst]

Okay. Great. And maybe as a follow-up, talk about the semiconductor market. There's plenty of news out there around high bandwidth memory, having yield issues various-- trying to keep up with demand. And the same with on the GPU side. Can you say what do you see in your pipeline that as far as where some of these issues are coming up, as your pipeline might be getting bigger and maybe even moving to a broader use of chiplet design?

[Paul Davis, executive]

Yes. Certainly, what we see with chiplet architecture on the logic side is something that we continue to monitor and see new companies talk about that Intel announced a chiplet type architecture with a product that they plan to announce in 2025. Obviously, AMD has had one had to use chiplet architecture for a few years now and continues to increase the number of products that they have. And we think that will continue to be the trend. As really the limits of Moore's Law in traditional ways have come to the limits there.



As it relates to high bandwidth memory, certainly, we're excited about HBM-4 and the possibility that at least some version of that down the road will need to include a hybrid bonded process as well to really get to the level of performance that we think they'll need to. It could be a few years until that happens. But certainly, it lines up well with when likely our memory licensees would be up for renewal as well.

[Operator]

Our next question comes from the line of Hamed Khorsand with BWS Financial.

[Hamed Khorsand, analyst]

First off, I just want to ask what's changed in the business in these last 6 to 8 months where your commentary today has really you're putting some emphasis on tuck-in acquisitions and making some sort of acquisition?

[Paul Davis, executive]

Yes, Hamed. I think it's a great question. Certainly, we've actually always focused on doing tuck-in acquisitions. It's something that's been part of our playbook. We focus on internal R&D though, first, and that's not going to change. So 85-plus percent of our portfolio is homegrown. It's from our inventors. And we see that really maintaining in that ZIP code.



However, there are occasionally opportunities that come to us or that we source where we see an opportunity to really add to the portfolio that augments our internal efforts as well. And so that really hasn't changed. We do like to highlight it, though. We did close a few deals earlier this year. It's something that as we look towards really expanding our markets into some of the adjacent markets and even in semiconductors where we see really opportunities to accelerate the revenue opportunity as well if we can add a high-quality portfolio to our own internal efforts as well.

[Hamed Khorsand, analyst]

Okay. And my other question was, is there a timing that you're expecting with the streaming and semiconductor license deals that you've been talking about all year.

[Paul Davis, executive]

Yes. I think one of the things that we always note is that what we do is very, very large deals and trying -- but we don't do a high volume of them, right? And so, getting the economics right, working with the customers is something that we really pride ourselves on in terms of getting the best economics that we can. And so, we focus on that aspect, getting the right deal done rather than trying to accelerate the time line and have to take a deal that we're not happy with. And so, the exact timing of it can shift quarter-to-quarter. But given where the deals are that we have in our pipeline, we're still very confident of that they'll close this year. And that's really what we've been saying all year, the exact quarter though, hard to predict.

[Hamed Khorsand, analyst]

Okay. And just a follow-up on that, if I may. You're running at average so far, the year about $85 million per quarter. Is that a good baseline for the business? Or is it going to be higher without the licensing deals happening?

[Keith Jones, executive]

It's a great question. So I think that $85 million is not necessarily a baseline. There's a number of renewals that we're working on. And then if you add in the subsequent license agreements that Paul is referring to that we talked about, both for OT and semiconductor, you're going to have a much higher baseline revenue level. So that is not what we see as an ongoing run rate. We see that run rate being much higher and that acts as a really good spring board as we move forward into 2025.

[Operator]

And we do have our last question comes from the line of Matthew Galinko with Maxim Group.

[Matthew Galinko, analyst]

Maybe firstly, with respect to the larger deals that we're kind of looking for in the back half of '24. How does the expectation for interest rate environment and kind of the macro backdrop influenced the discussions around the licenses. Is there a risk that uncertainty in macro could grow along discussions? Or just help us understand some of the sensitivity there?

[Paul Davis, executive]

Yes, Matt. I think we often get that question especially in times of uncertainty and what we've experienced historically, given the long-term nature of the deals that we do is that, that usually has very little impact on the overall timing or economics that we're able to achieve. I think the customers that we are often talking to are very large sophisticated companies. They understand that there's going to be various cycles that the industry goes through.



Certainly, on the semiconductor side of things, there are very well-known cycles where there are ups and downs and same with media, whether it be in advertising or otherwise where you see cycles of really a boom and then a slowdown. For us though, we're usually able to navigate through that and get those deals done really at the same level of expectations we have. And so we don't anticipate really seeing any sort of challenges because of that environment.

[Matthew Galinko, analyst]

Okay. And then I guess, on the question on the OpEx run rate. It sounds like you had a couple of moving pieces in the OpEx number this quarter, some in favor and then maybe some increase in outside spending. So I guess, can you give us a bit of a sense of what we should be expecting as the baseline moving forward? I guess we can kind of back into it with your guidance, but maybe if there's anything you could share that kind of pushes us in the right direction.

[Keith Jones, executive]

Yes, Matt, great question. So if you take a look at our OpEx, we'll kind of look at a few items here. So our R&D has been on an upward tick, and that's by design and plan. We continue to make a considered effort to invest and grow our patent portfolio. So we will continue to see that trajectory. And if you take a look at even the amount relative to our revenue as a percentage, it's going to be in that mid-teens throughout the remainder of the year. So that is the path that we had anticipated to continue to go through that. And also, what you see from there is us making some of those investments in the outside from a third-party perspective to help accelerate some of those efforts.



On the SG&A side, we had a good guy as I like to call it. We had the bad debt recovery. But if you kind of even that out and as well as some of the administrative costs, we would have a slight uptick quarter-over-quarter if you just kind of balance those 2. Now what we've seen, and quite frankly, this puts a smile on my face as being part of the management team is we've actually done a tremendous job internally of developing out these new platforms. When I say these new platforms, it's the 6 new areas in our new media and then also on semiconductor side, most notably, as we talked about co-optimization.



So what we really wanted to do was give ourselves a lot of expertise in [indiscernible] just to really kind of grow these platforms. And with that, doing deep dives in terms of learning about the customers, doing product breakdowns and all those other good things. And what we found is that while we have a new team, we have a very talented team that gets up to speed extremely quickly. So we are making great progress with a less of a reliance on outside third parties.



And that's what you see in terms of us bringing down our overall guidance and in part with a little bit lower spend in the first half of the year on litigation, but you'll see an uptick in Q3 and then a little bit more modestly in Q4. And as you see, we reset the guidance to be about $5 million lower than we set out at the beginning of the year.

[Operator]

That concludes the question-and-answer session. Mr. Paul Davis, our CEO, I turn the call back over to you.

[Paul Davis, executive]

Thank you, operator. I want to thank our employees for the strong first half of the year and the progress we have made towards achieving our goals for 2024. Later this month, we will be participating in the Rosenblatt Age of AI conference and at the BWS Securities Conference in New York City. We look forward to seeing you at these events and at other investor events in the coming months. Thank you for joining us today.

[Operator]

Ladies and gentlemen, that concludes today's conference call. You may now disconnect.